Dec 11, 2012
Authors: Harold P. Reichwald | John F. Libby
In the mid-'80s Ivan Boesky was the harbinger of today's hedge fund operators. He functioned as an arbitrageur and amassed a very large fortune. However, he was convicted of insider trading and was disgraced. Before his fall from grace, Boesky made a speech in which he said: "I think greed is healthy. You can be greedy and still feel good about yourself." This comment became part of film lore in the words of Gordon Gekko, the character in Wall Street, that "greed is good."
Last week, a jury in Los Angeles federal court in a case entitled FDIC v. Van Dellen, et al. found three former officers of the failed IndyMac Bank liable for $168 million in losses in construction loans suffered by the bank's Homebuilder Division. After the verdict was announced, some of the jurors commented that the greed of the defendants, built into their performance-based compensation based on production, was partly responsible for the losses that led to the verdict.
However, there are other lessons to be learned from the jury's quick verdict after a sixteen-day trial that was, in the words of one juror, "mind-numbingly repetitive." These lessons are of interest not only to former officers who have found themselves in the FDIC crosshairs but also to D&O insurance carriers who already are funding the defense of cases brought by the FDIC and others who are engaged or may in the future engage in negotiations with the FDIC over possible settlement of claims before litigation.
These are sobering reflections on the first FDIC-initiated case to come to trial since the housing crisis arose over four years ago. In all likelihood, the FDIC will feel emboldened by this trial court victory, and it will have an immediate effect on potential settlements in a number of cases. The case undoubtedly will be appealed on a number of issues, including the question of the applicability of the business judgment rule to officers in California. Still, it offers lessons for those dealing with the FDIC in other pending cases and those yet to be brought.
John F. LibbyPartner
Jacqueline C. WolffPartner
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